Significant inflation and unfavorable 1.4% U.S. gross domestic solution (GDP) development in the 1st quarter has some investors worried that the economic system could be in a recession correct now. Right until GDP facts for the 2nd quarter is launched in the coming weeks, this concept are unable to be verified or refuted.
At any rate, it can be a excellent plan to put together your portfolio for a economic downturn by allocating cash to economic downturn-resistant sectors of the economic climate. Demand from customers for health care products and solutions tends to steadily increase, irrespective of the point out of the financial state.
The pharmacy operator and wellness insurer CVS Health and fitness (CVS .89%) appears to be like a acquire for traders searching to position their portfolios for an financial downturn. Let us dig into 3 explanations why.
1. Sturdy progress to commence the 12 months
CVS Overall health recorded $76.8 billion in profits in the initially quarter of 2022, which was up 11.2% calendar year in excess of calendar year. What contributed to this extraordinary revenue progress? The reply is that each and every of the company’s three segments turned out higher-one-digit to reduced-double-digit profits growth in the quarter.
The health care benefits phase claimed $23.1 billion in profits throughout the quarter, which was 12.8% higher year more than calendar year. Rising demand for Aetna’s overall health insurance policy led clinical membership to enhance 3.8% more than the calendar year-ago interval to 24.5 million at the end of the quarter. Together with wellbeing insurance policy premium hikes, this points out the segment’s growth.
The firm’s pharmacy solutions phase posted $39.5 billion in earnings in the first quarter, which was an 8.6% 12 months-about-calendar year progress amount. The equal of 30-working day prescriptions stuffed grew by 5.8% more than the calendar year-ago period to 567 million for the duration of the quarter. Rate inflation in prescriptions filled accounted for the remainder of the firm’s revenue advancement in the quarter.
CVS Health’s retail phase created $25.4 billion in earnings for the initially quarter, which was a 9.2% year-over-calendar year development fee. The sale of around-the-counter COVID-19 testing kits and bigger prescription volumes aided to draw far more consumers into the merchants, foremost them to purchase far more.
CVS Health made $2.22 in non-GAAP (modified) diluted earnings for each share (EPS) in the to start with quarter, which was 8.8% bigger around the yr-back time period. Better prices prompted the firm’s non-GAAP web margin to tumble 10 foundation points 12 months over 12 months to 3.8% during the quarter. And CVS Health’s weighted-common shares remarkable greater .5% around the year-in the past interval to 1.3 billion in the quarter. This points out why the firm’s earnings progress lagged its income expansion for the quarter.
2. Potent dividend progress lies forward
CVS Health’s stable working fundamentals also should translate into large dividend development in the years forward.
This is for the reason that the stock’s dividend payout ratio is expected to be 26.5% in 2022. This delivers CVS Health with more than enough cash to execute acquisitions, comprehensive share repurchases, and repay financial debt to retain modified diluted EPS trending bigger. And the payout ratio is low sufficient that I believe that the dividend will grow faster than earnings in excess of the upcoming five years. Given that analysts are anticipating 5.7% yearly earnings advancement by way of the subsequent five years, I would be amazed if CVS Well being fell quick of superior-solitary-digit annual dividend expansion.
Provided the stock’s 2.4% dividend yield, CVS Well being can supply traders with a pleasant blend of both of those present and long term income.
3. The inventory looks to be undervalued
CVS Health’s 13% yr-to-day drop in its share value to $91 has built it a terrific choose in which to buy the dip.
The stock’s forward price-to-earnings (P/E) ratio is 10.9. For context, this is very well under the S&P 500 healthcare sector normal of 15.9. And the corporation also is low-priced as opposed to its historical valuation. Regardless of its stable fundamentals, CVS Health’s trailing 12-month price tag-to-income ratio of .4 is reduce than its 10-yr median of .5.